(BFM Bourse) – A strong surge in bond yields is observed on both sides of the Atlantic. The persistence of inflation is causing fear in the euro zone and the United States, while doubts about the sustainability of public finances are worrying in the United Kingdom.
This is a trend that has been emerging since December and which has even accelerated at the start of the year: bond yields are experiencing a feverish surge.
“One of the most powerful dynamics over the past month has been the almost uninterrupted rise in long-term rates, particularly on both sides of the Atlantic,” noted Sebastian Paris Horvitz of LBPAM on Wednesday.
In just over a month, the rate on the 10-year US debt security has increased from around 4.18% to 4.7% currently on the secondary market (where investors trade between them the titles). The rate at the same maturity for Germany currently stands at 2.564%, compared to 2.09% at the end of November.
On the French side, the yield on the 10-year assimilable Treasury bond (OAT) is at 3.411% compared to 2.9% at the end of November. The increase is even greater in the United Kingdom, where the rate on the 10-year Gilt stands at 4.85% compared to 4.24% in November.
The upward movement in bond yields is therefore widespread on both sides of the Atlantic.
>> Access our exclusive graphic analyses, and gain insight into the Trading Portfolio
The Fed is a game changer
This surge in rates has its roots in particular in the outcome of the last meeting of the American Federal Reserve (Fed). Members of the central bank and in particular its president, Jerome Powell, then stressed that more efforts must be made to reduce inflation to continue the reductions in key rates.
The “minutes” (reports) of this meeting, published Wednesday evening, also indicated that the members of the Fed feared a resurgence of inflation, notes Ricardo Evangelista of Activtrades.
In a note published this Friday, January 10, UBS emphasizes that the rise in American yields was due to a combination of factors, namely the more restrictive tone of the Fed since the last meeting, but also the robust American statistics, which make it less relevant rate cuts.
Questions about Donald Trump’s economic policy, perceived as inflationary, may also play a role. Even if this factor has been on the market’s mind since October, when investors began to bet (rightly) on the victory of the Republican candidate during the presidential election.
A little tension may also arise on the side of American debt issues. “There is a huge amount of debt in the market,” Gregory Peters, co-head of investments at PGIM Fixed Income, said on Bloomberg TV. “Supply continues to grow. Add to that the fact that inflation may be a little more stable or reversing, and the pressure on the bond markets increases,” he said. he added.
Inflation persists in the euro zone
The “ramp”-shaped surge in US rates since December “has completely replicated itself on euro zone yields, whereas this was not the case before”, underlines Alexandre Baradez, head of market analysis. at IG France.
UBS makes the same observation, noting that Germany’s Bund (10-year bond) has followed the same path as American borrowing rates. “Long-term rates have tightened significantly since the start of the year in Europe, partly due to the rise in rates in the United States,” adds Sebastian Pariz Hovitz of LBPAM.
This is because the inflationary risk in the United States is a reminder that the fight against inflation has not been won in the euro zone either. “Fed members are worried about the persistence of inflation in the United States. But the fact is that underlying inflation in the United States is at the same level as in the euro zone around 2.7 %-2.8% and that there has been little progress (on a reduction, Editor’s note) for several months”, remarks Alexandre Baradez.
The latest inflation figures in the euro zone published this week clearly show this. At 2.7%, underlying inflation in the monetary union in December remained unchanged for four consecutive months, notes Barclays.
The problem with this persistent inflation is that it gives the European Central Bank (ECB) less room to reduce its rates, even though activity is less dynamic in the euro zone than in the United States.
“The persistent rigidity of services inflation in the euro zone means that the ECB should continue to slowly reduce interest rates, even if the economic outlook remains poor,” Capital Economics pointed out on Tuesday.
Note that in this context of rising rates, France’s last medium-long term debt auction went well on Thursday. Demand thus largely exceeded the debt supply made by Agence France Trésor, exceeding it by 2 to 3 times depending on the securities offered.
The United Kingdom is seriously concerned
The case of the United Kingdom is more unique and more worrying. Inflationary risks also push bond yields higher. But unlike the eurozone, debt fears are emerging due to the Labor government’s economic policy.
“The weakness of the pound sterling and the gilt market (British sovereign bonds, editor’s note) seems to be the inevitable consequence of a poorly received budget,” underlines Matthew Amis, of abrdn.
“We believe that Mrs Reeves (Rachel Reeves, the Chancellor of the Exchequer, equivalent to the Minister of Finance, Editor’s note) will have broken her own newly drawn up budgetary rules when the OBR (an independent body for evaluating public finances, Editor’s note) will present its updated forecasts at the end of March,” he adds.
The pound has also fallen while British rates are soaring. A market reaction completely against the grain of habits (normally higher rates support a currency, all other things being equal). Which shows market distrust of the British economy.
“It is likely that the government will be forced to react to calm the market. Also, this risks making the Central Bank even more cautious, with inflationary pressures exacerbated by the decline in the currency,” notes Sebastian Paris Horvitz, of LBPAM. The latter argues that the Labor government had previously adopted a “lax” budget and fears that the United Kingdom is falling into an “adverse spiral” with rising debt costs.
Note that yields are also rising in Japan but much more gradually and at lower levels. The country’s 10-year debt security displays a rate of 1.212%, reaching its highest level since 2011. This is due to the fact that the country has now emerged from the very long disinflationary period that it experienced for years. This should push the Bank of Japan to raise its rates.
“Given the continued weakness of the yen, the strength of inflation and the scale of wage increases amid labor shortages (our forecast for this year’s spring wage negotiations is 5%), the Bank of Japan’s rate hike trajectory remains intact,” Barclays explains.
Julien Marion – ©2025 BFM Bourse
